MMP Blog #13: Commodity Money Coins? Metalism versus Nominalism, Part Two

By L. Randall Wray

Last week we examined the origins of coins, arguing that coinage is a relatively recent development. From the beginning, coins did have precious metal content. We examined a hypothesis for that, because from the MMT view, the “money thing” is simply a “token” or record of debt. If that is true, why “stamp” the record on precious metal? For thousands of years, debts were recorded on clay or wood or paper. Why the switch? We argued that the origins of coins in ancient Greece must be placed in the specific historical context of that society. Use of precious metal was not a coincidence, but also was not consistent with the commodity money view. While it is true that use of precious metal was important and perhaps even critical, this was for social reasons and was tied to the rise of the democratic polis. This week, we examine coinage from Roman times to the present in Western society.

Roman coins also contained precious metal. But there is very little doubt that Roman law adopted what is called “nominalism”—the nominal value of the coin is determined by the authorities, not by the value of embodied metal in the coin (termed “metalism”). The coin system was well-regulated and although precious metal content changed across coinages, there was no significant problem with debasement or inflation. In Roman law, one could deposit a sack of particular coins (in sacculo) and when repaid demand the same coins to be returned (vindication). However, if one were owed a sum of money (rather than specific coins), one had to accept in payment any combination of coins tendered that were “money of the realm”—officially sanctioned coins with payment enforced in court (condictio).

This practice continued through the early modern period, in which one deposited for safe keeping either sealed sacks of coins (and could demand exactly the same coins back in the still-sealed bag) or loose coins (in which case, any legal coins had to be accepted). Hence, “nominalism” prevailed in the general, although what appears to be a form of “metalism” applied to specific coins in sacculo.*

In reality, it had more to do with the view that coins were a “moveable chattel”, something the owner had a property interest in. However, once the owner’s loose coins were mixed with other coins, there was “no earmark”—no way of determining specific ownership and hence the claimant only had a claim to be repaid in legal money—the legalis moneta Angliae, for example in England, which was stipulated to be a sum of “sterlings”. There was no sterling coin (indeed, England did not even coin the Pound, its money of account), rather, the debt was paid up by providing the appropriate sum of coins declared lawful money by the Crown—and could include foreign coins—at the nominal value dictated by the King.

The authorities that issued coins were free to change the metal content at each coinage; penalties for refusing to accept a sovereign’s coin in payment at the value stated by the sovereign were severe (often, death). Still, there is the historical paradox that when the King was paid in coin (in fees, fines and taxes), he would have them weighed—and reject or accept at lower value the coins that were low weight. If coins were really valued nominally, why bother weighing them? Why did the issuer—the King—appear to have a double standard, one nominalist, one metalist?

In private circulation, sellers also favored “heavy” coins—those that weighed more, or that were of higher fineness (more precious metal content). They certainly did not want to find themselves in the situation of trying to make payments to the Crown with low weight coins. Hence, a “Gresham’s Law” would operate: everyone wanted to pay in “light” coins, but to be paid in “heavy coins”. There was thus obvious concern with the metal content of coins, and fairly accurate (and quite tiny) scales were manufactured and sold to weigh coins individually. This makes it appear to modern historians (and economists) that “metalism” reigned: the value of coins was determined by metal content.

And yet we see in the courts rulings indications that the law favored a nominalist interpretation: any legal coin had to be accepted. And we see Kings who imposed long prison terms (the sentence was usually to serve “at the King’s pleasure”—a nice way of putting it! One can just imagine the King’s pleasure at holding indefinitely those who refused his coins.), or death, for refusing any coin deemed legal. It all appears so confusing! Was it nominal or was it metal?

The final piece of the puzzle appears to be this: until modern minting techniques were invented (including milling and stamping), it was relatively easy to “clip” coins—cut some of the metal off the edge. They could also be rubbed to collect grains of the metal. (Even normal wear and tear rapidly reduced metal content; gold coins in particular were soft. For that reason they were particularly ill-suited as an “efficient medium of exchange”—yet another reason to doubt the metalist story.)

This is why the King had them weighed to test for clipping. (As you can imagine the penalty for clipping was severe, including death.) If he did not, he would be the victim of Gresham’s Law; each time he recoined he would have less precious metal to work with. But because he weighed the coins, everyone else also had to avoid being on the wrong side of Gresham’s Law. Again, far from being an “efficient medium of exchange”, we find that use of precious metals set up a destructive dynamic that would only finally resolved with the move to paper money! (Actually, even paper is less than ideal; perhaps some readers have experienced problems getting older paper money accepted—as I did even in Italy before it adopted the euro—due to Gresham Law dynamics. Thank goodness for computers and keystrokes and LEDs.)

Kings sometimes made those dynamics worse—by recanting his promise to accept his old coined IOUs at previously agreed upon values. This was the practice of “crying down” the coins. Until recent times, coins did not have the nominal value stamped on them—they were worth what the King said they were worth at his “pay houses”. To effectively double the tax burden, he could announce that all the outstanding coins were worth only half as much as their previous value. Since this was the prerogative of the sovereign, holders could face some uncertainty over the nominal value. This was another reason to accept only heavy coins—no matter how much the King cried down the coins, the floor value would be equal to the value of the metallic content. Normally, however, the coins would circulate at the higher nominal value set by the sovereign, and enforced by the court and the threat of severe penalties for refusing to accept the coins at that value.

There is also one more aspect to the story. With the rise of the Regal predecessors to our modern state, there were the twin and related phenomena of Mercantilism and foreign wars. Within an empire or state, the sovereign’s IOUs are sufficient “money things”: so long as the sovereign takes them in payment, its subjects or citizens will also accept them. Any “token” will do—it can be metal, paper, or electronic entries. But outside the boundaries of the authority, mere tokens might not be accepted at all. In some respects, international trade and international payments are more akin to barter unless there is some universally accepted “token” (like the US Dollar today).

Put it this way: why would anyone in France want the IOU of France’s sworn enemy, the King of England? Outside England, the King’s coins might circulate only at the value of precious metal contained in them. Metalism as a theory might well apply as a sort of floor to the value of a King’s IOU: at worst, it cannot fall in value much below gold content as it can be melted for bullion.

And that leads us to the policy of Mercantilism, and also to the conquest of the New World. Why would a nation want to export its output, only to have silver and gold return to fill the King’s coffers? And why the rush to the New World to get gold and silver? Because the gold and silver were needed to conduct the foreign wars, which required the hiring of mercenary armies and the purchase of all the supplies needed to support those armies in foreign lands. (England did not have huge aircraft to parachute the troops and supplies into France—instead they hired mainland troops and bought the supplies from the local outfitters.) There was a nice vicious circle in all this: the wars were fought both by and for gold and silver!

And it made for a monetary mess in the home country. The sovereign was always short of gold and silver, hence had a strong incentive to debase the currency (to preserve metal to fund the wars), while preferring payment in the heaviest coins. The population had a strong incentive to refuse the light coins in payment, while hoarding the heavy coins. Or, sellers could try to maintain two sets of prices—a lower one for heavy coins and a high one for light coins. But that meant toying with the gallows.

The mess was resolved only very gradually with the rise of the modern nation state, a clear adoption of nominalism in coinage, and—finally—with abandonment of the long practiced phenomenon of including precious metal in coins.

And with that we finally got our “efficient media of exchange”: pure IOUs recorded electronically. Precious metal coins were always records of IOUs, but they were imperfect. And boy have they misled historians and economists!

Admittedly, I have not yet made a thorough case that money must be an IOU, not a commodity. We need some more building blocks first.
References

* I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.

20 Responses to MMP Blog #13: Commodity Money Coins? Metalism versus Nominalism, Part Two

  1. Last week we said that "gold" is not money, but it seems that market behavior does not agree with this. That is, Why are central banks buying gold now? Why does the Fed still hold gold on the balance sheet (also, especially if gold is in a bubble it would be rational to sell now)?For any central bank wouldn't a riskless treasury be more rational choice than gold?Are citizen that purchase gold to protect their purchasing power from concerns of high inflation, operating irrationaly?It seems to me that individuals and central banks are either behaving irrationally (as we know the US cannot default) whereas MMT (and economics itself) presume people behave rationally (utility/profit maximizing). Or there is a real concern with the stability fiat. And gold therefore occupies some special unspoken place in the monetary system (contrasted to sea shells that have gone the way of history). So what is gold if it is not money? And is MMT an accurate or theoretical description of the monetary system?

  2. Gold is an asset – like copper.Remember tulip bulbs?

  3. In addition to putting a floor on the cost of money, putting precious metal in coins made forgery a costly enterprise – discouraged it. With regard to the floor on the price of money – for a while the New Zealand 50c was worth about 60c as scrap metal. They were pretty sought after…

  4. @ jeffGold can be no money AND a valuable asset. Just like a company stock can be a worthy investment without being money…

  5. Let's assume gold is not money but an asset. Tulips and stocks are fine examples of assets. I use sea shells, because like gold at one time it was used as a currency. And how ridiculous would it be if governments were now accumulating sea shells for $1800 an ounce. Now they don't accumulate sea shells but they are accumulating and retaining gold. That is, they are speculating by retaining/purchasing gold relative to their fiat currency. And they are placing their balance sheet under greater risk instead of purchasing riskfree treasuries of their fiat. And note, the governments do buy distressed stocks (AIG or GM) but quickly divest it when it becomes "profitable". Either central bankers are behaving irrationally by wrongly questioning their fiat and purchasing/retaining sea shells (I mean gold). And then question if MMT is fully descriptive of the monetary system, because like much of economics itself, because it presumes people behave rationally (risk adjusted utility/profit maximization).Or central banks are rational and are acting on a real concern with the stability of fiat. And thus this hoarding of gold occupies a special place in the monetary system (beyond sea shells and other assets), which again does not fit the MMT model.

  6. Actually, good question. Randy, do you think all these central banks are going to get burned when the gold price collapses?If so, Presidente Chavez is going to be 'muchos' disappointed!

  7. Can you pay your taxes in gold?

  8. You might be able to pay taxes with gold, but you'd have to accept whatever exchange to dollar value the IRS/Treasury was willing or able to set- it could easily say that it would accept it at a 10 or 20% discount to the current exchange rate, or even say that it was only willing to allow $1/oz. It wouldn't even have to be consistent about it.One dollar must always offset one dollar of tax obligations. The fact that we're not on a gold standard means that you have no similar guarantee there.

  9. What will happen to CBs balance sheets when gold prices collapse? Hmmmmmm let me see……………… the same thing that happens when the housing prices collapse and all those CDOs are worth nothing that they purchased which is NOTHING. The CB cant really lose money the same way the govt cant really borrow money. If gold prices collapse they wait a while and then they probably can get Glen Beck to empty his bank account for it.

  10. I don't mean this to be question about hyperinflation or gold collapse to CB solvency or a claim that gold is currency. Rather I'm pointing to the irony of CB buying and hording gold in exchange for their "fiat". Why would CB continue to horde gold and not horde seashells? And if gold is in a bubble (which I believe it is forming), why not "dump" the gold before it collapses?I conclude that CB (both emerging and developed) are "afraid" of fiat and gold serves to ease their concern not they could ever admit that. Gold appears to serve some purpose beyond traditional assets or seashells today and different from currency. I'm looking for a realistic explanation of observed behavior of gold and its fit with monetary theory.

  11. "Because the gold and silver were needed to conduct the foreign wars, which required the hiring of mercenary armies and the purchase of all the supplies needed to support those armies in foreign lands."Did hiring the mercenaries, which earned income via the circulating coins, increase demand in the economy? Since war diverted resources that would have been used for more productive endeavour, did it just lead to inflation as mercenaries bid up prices of ex. foodstuffs, making them out of reach of non-mercenaries?"The sovereign was always short of gold and silver, hence had a strong incentive to debase the currency (to preserve metal to fund the wars), while preferring payment in the heaviest coins. The population had a strong incentive to refuse the light coins in payment, while hoarding the heavy coins."Was this inflationary (debasement) or deflationary (hoarding coins)? How did monarchs respond to hoarding?

  12. What is the price gold based on?.. Leveraged fiat money i.e, the dollar. I am thinking with a truly sovereign currency like the dollar gold would be totally meaaningless as a central bank "asset". Maybe the treasury could mint commemoritive coins/ earn a small amount for seignorage. Maybe sovereign wealth funds or central banks at the mercy of sovereign currencies like the dollar or euro may somehow gain some sort of short term advantage.

  13. I believe the 'greater fool' theory explains the rush to gold. Maybes there's something to it and one is afraid to ignore and then perhaps it will just keep going up and I can always get rid of it if and when it starts downward. And lots of people don't know about MMT and really believe the gold bugs.

  14. Jeff,Either central bankers are behaving irrationally by wrongly questioning their fiat and purchasing/retaining sea shells (I mean gold). And then question if MMT is fully descriptive of the monetary system, because like much of economics itself, because it presumes people behave rationally (risk adjusted utility/profit maximization).A couple things:1) Some central bankers may very well be acting out of ignorance.2) To the extent that I have read the literature, MMT doesn't make any assumption of rational expectations akin to the current mainstream.3) If they can make the gold purchases using their own currency, it's basically an FX intervention without the stigma of an FX intervention.4) Central banks may be acting rationally and still not be "afraid" of fiat – they may be afraid of American fiat because congress nearly drove the global economy off a cliff recently. So diversifying FX holdings to include more shiny stuff could be rational if you're afraid of a really screwed up tail risk: global financial armageddon.Nothing about gold purchases or the perceptions of central bankers invalidates MMT, just as a country choosing to default on obligations in its own currency doesn't invalidate MMT.

  15. Javamann,I believe the 'greater fool' theory explains the rush to gold. Maybes there's something to it and one is afraid to ignore and then perhaps it will just keep going up and I can always get rid of it if and when it starts downward. And lots of people don't know about MMT and really believe the gold bugs.True that. I think it's a combination of gold bugs who don't realize it's going to collapse toward its long run purchasing power, gold bugs who do realize it's overpriced but who think the world is going to fall apart, and traders who don't care and are just riding the wave.

  16. The point was made that the precious metal content could provide a "floor" of value.One only has to look through history to see that the metal content itself provided the accepted value of the exchange. Most recently in WW2, gold bullion, devoid of any stamp of nominal or declared value, took the place of paper currency for transactions between nations. And why not. If you can't be certain in a time of war whether the country will exist, why accept paper? Or electronic entries?Like it or hate it, gold has been an effective, if imperfect, unit of account, long before the Turks started using it in coinage.

    • Anonymous:
      “The point was made that the precious metal content could provide a “floor” of value.One only has to look through history to see that the metal content itself provided the accepted value of the exchange. Most recently in WW2, gold bullion, devoid of any stamp of nominal or declared value, took the place of paper currency for transactions between nations”

      An important distinction that must be made when taking of money is the difference between domestic & international spheres.
      The operations within an individual monetary system vs. the interactions between individual monetary systems.
      Money may not remain money once it leaves the confines of monetary system.
      Outside the monetary system, dollar bill is just a piece a paper and a coin is just a hunk of metal.
      Gold coins or an international gold standard allows those nations holding foreign currency to at least get something for their holding, being able to exchange them at a fixed price for gold or in the case of coins, their bullion value.

      A nation has next to no control over their currency outside the domestic economy.

  17. In circulation, where money functions as the medium of exchange, and market participants are interested in selling goods in order to obtain other goods, then money takes the form as a token. It is the "ticket" that gains us admission into the market. As long as the coin is accepted in trade, since market participants' objective is to obtain goods other than what they hold, then the functions of money as unit of account and medium of exchange dominate.This is where the liability aspect of money asserts itself, the holder of money is in the possession of something no one wants in itself, but only as a means for obtaining something different than what they currently possess.Now, when a coin is withdrawn from circulation, its asset aspect reveals itself – it is something the holder wants to hoard due to its function as a store of wealth. So, it is not surprising that the King weighs his coin when accepting it in payment, whereas all others must accept the nominal value stamped, regardless of its weight/quality.Money reflects this fundamental contradiction of functioning as both a means of circulation (a liability) as well as a store of value (an asset). Clearly it is not the money object itself that changes its character at will, but the relationship of how people use money – whether through circulation or for wealth accumulation/hoarding. Of course, both of these activities occur simultaneously in the economy.Looking at US history, we see this conflict manifest itself in the free silver movement, where farmers and workers wanted more money in circulation to stimulate the real economy, whereas banks wanted to keep the gold standard to retain the relationship of wealth accumulation (e.g., uphold the value of private debt).And today we see a similar situation where households want more economic activity to generate jobs and income, but there are others who find this a threat to the value of their accumulated claims on society.We need to understand money, not to resolve its contradictory nature – that is impossible – but to help understand what unspoken political positions people support when they talk about economics.

  18. I think that the argument would be improved if it could be shown that the Romans used/needed to use something else beyond coins to use in everyday life as money. Like the British tally sticks. Or a bar tab.

    I wonder to what extent the talk about mercenaries undermines your argument. They wanted bullion/pure gold as payment. Why? Because it was real value. Useful anywhere.

    BTW My theory is that gold is somehow tied to status. Humans are primates and live in societies where status determines how well you live. Gold is a universal status object in the sense that almost all cultures valued it (at least if it occured in their enviornment). Why? That is an interesting question. My crazy theory is that women like it as jewlry. And the women therefore bestow the value as the status object.

    As to why do CB not dump gold or buy gold? 1st, do CB need to maxamize profits like a normal economic player? Or can ‘bad press’ be enough to discourage an action? If the CB dumps gold near the top of a bubble it will get the ‘blame’ when it bursts. If it buys gold during the run up with fiat currency it is kinda cheating, isn’t it? It can get the stuff (currency) for free. And then it either sells the gold near the top and ’causes’ the bubble to pop or it takes a bath if it holds it too long.
    In any case it looses. Better to make money by skimming off the top of the economy. My 2 cents.

    • SF:
      “I think that the argument would be improved if it could be shown that the Romans used/needed to use something else beyond coins to use in everyday life as money. Like the British tally sticks. Or a bar tab.”

      In ancient times most transaction were conducted on credit.